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McDonald's Same-Store Sales Up 4.7% in First Quarter

CHICAGO (AdAge.com) -- McDonald's continued to broil its competition in the first quarter, with same-store sales up 4.7% over last year in the U.S, an impressive feat for a mature, expansive and already highly profitable system. The fast feeder credited its success to its everyday-value proposition and advertising behind full-price "core menu" items such as Big Mac and Chicken McNuggets.

President-Chief Operating Officer Ralph Alvarez said that support of iconic, core products, like the Quarter Pounder with cheese, continues to deliver results.
"We all know the state of today's consumers: They're scaling back and being more discerning about what they purchase," CEO Jim Skinner said during the call with analysts. "Our value menus around the world offer predictable, everyday affordability, and our core menu, including iconic products like the Quarter Pounder, provide great value at the mid-tier. This tiered-pricing, across-the-board value means we are in a position to grow our market share not only in the near term but in the long term as well."

McDonald's net income was up 3.5% to $980 million for the quarter, which ended March 31, from $946 million the year before. Earnings per share of 83 cents beat Wall Street consensus by a penny.

Campaigns around specific items
Although the chain's Dollar Menu advertising is well-known, McDonald's has built big campaigns around specific menu items in the past year, including the revivification of its "Big Mac Chant" and its annual Filet-o-Fish push during Lent, this year with a particularly popular campaign from Arnold.

"Our support of iconic, core products continues to deliver results," said President and Chief Operating Officer Ralph Alvarez. "First-quarter advertising focused on the Quarter Pounder with cheese, and we are still benefiting from the McNuggets promotion at the end of last year. The emphasis on core products has generated average check growth and increased restaurant profitability." This summer, he said, McDonald's will promote its espresso-based McCafe beverages, its value menu and promotional dollar drinks.

Indeed, as the company's more-profitable sales have grown, its lower-margin business has slowed. Last fall, McDonald's raised the price on its double cheeseburger 20 cents, answering franchisee complaints about food costs. Now McDonald's Dollar Menu sales have fallen to about 10% of overall sales, from about 14% earlier this year.

McDonald's also confirmed, as first reported by Crain's Chicago Business, that it will launch its third of a pound Angus burger later this year. Angus will be McDonald's first major burger launch since The Big N' Tasty in 2001. Executives are promising a big advertising push behind the new, more premium-quality burger.

Analysts were eager for more details on the chain's long-awaited McCafe rollout and the first national advertising, expected in late May or early June. Mr. Skinner declined to confirm the date for the initial push, citing proprietary reasons. Both Mr. Skinner and Mr. Alvarez said investors won't see what McCafe will mean to the bottom line until national advertising begins.

"There's nothing like national advertising, because you get to be in program advertising on prime network TV," Mr. Alvarez said. "That only happens on national and always stronger than what you could replicate locally." He added that McDonald's will use the softer media market "as an opportunity to do even more advertising."

Nearly impossible feat
The chain said it has McCafe drinks in about 10,000 of its U.S. restaurants and plans to complete the rollout in May. The feat seemed nearly impossible to most analysts and industry experts just last fall, as adding the beverage platform represented a sizable capital investment for each store.

One analyst noted that McDonald's blamed last summer's heat for sluggish McCafe sales in certain test markets and asked if it might not be better to hold off until fall.

"There's never a bad time to nationally advertise high-quality products," Mr. Alvarez said, adding that the chain will be adding smoothies and frappes, as well as advertising iced coffee and other cold drinks.

"Our business is much steadier than the rest," he said. "We'll be out there all year."

McDonald's has been besting its competition for the better part of the past year. Burger King grew same-store sales 1.9% in the U.S. and Canada in its most recent quarter. The company warned last week that it has seen an unanticipated decline in March traffic. Burger King will report earnings next week.